The Federal Reserve’s third quantitative easing program has been doing a good job
Credit Suisse’s head of mortgage strategy, Mahesh Swaminathan, told listeners to a recent CS conference call that at deadline mortgage-backed securities spreads had been notable tighter than ever seen historically.
He also noted that normally when mortgage valuations get rich, there is a reallocation generally into corporate bonds. However, he said it appeared most investors were taking a wait-and-see approach before making such a move.
As Swaminathan noted, Federal Reserve officials have said they are aware of the potential disruptions to the mortgage-backed securities market from their quantitative easing efforts and will make efforts to avoid or mitigate them.
These include stress in the dollar roll market, a mortgage-backed securities financing trade involving forward sales. The Fed may consider this concern in the timing of the settlements of its mortgage-backed securities purchases, he said.
Swaminathan also noted that, relative to the private market, there continues to be some upward pressure on agency mortgage rates due to guarantee fee increases.
Meanwhile, the consumer mentality toward renting compared to owning is starting to shift toward one in which buyers are starting to view purchases as an alternative to higher rents, Dan Oppenheim, a homebuilder sector equity analyst at Credit Suisse, said.
In the mortgage real estate investment trust sector, players with prepayment protection in the form of collateral resistant to refinancing might be favored as rates drop, said another Credit Suisse equity analyst, Doug Harter. He said he currently favors hybrid REITs.
When asked how REITs may achieve prepayment protection, he noted that this might be achieved by targeting loans that already have gone through the Home Affordable Refinance Program, for example.
Separately, Swaminathan said there has been there has been a tapering off in HARP prepayments and that prepayments in this area are somewhat stable.
The government-sponsored enterprises are likely to ramp up their REO-to-rental bulk sales going forward, he said, when asked about the outlook for the GSEs.
He said the most significant recent development in this area is probably the GSEs’ outline of a new representation and warranty policy, which among other things would limit lender liability on a loan after 36 months of on-time borrower payments.
As noted previously on this publication’s website, Swaminathan said this is expected to loosen the credit box for originations down the line, although it may take some time for the industry to gain enough confidence in it for that to occur.
Other forward-looking mortgage trends equity analysts in financial services and homebuilding sectors were focused on during the call included how mortgage servicing rights might be affected by Basel III accounting rules and interest rates movements going forward.
